Virtual Family Office
The concept of a family office has been around for many years. Traditionally, family offices have been reserved for the ultra-wealthy and have been expensive to establish and operate. This is because all staff is required, and the infrastructure is paid for by the single-family group.
A New Model: The Virtual Family Office
Virtual Family Offices (VFOs) have become increasingly popular among many high-net-worth successful families. Offering a range of services that help families manage their wealth, including investment advisor, accounting and reporting, financial planning, insurance analysis, and management, family governance and education, philanthropic planning, tax advisory and regulatory compliance, estate planning, and concierge services.
This can be especially important for families with complex financial structures, multiple business interests, or geographically dispersed families.
What is a Virtual Family Office?
A virtual family office (VFO) is a type of family office that provides wealth management services to a family or family group without the need for a physical office. Instead, the VFO team is typically composed of independent professionals who collaborate remotely to provide the family with the services they need.
Services that are typically offered are investment management, tax planning, estate planning, philanthropic planning, family governance, risk management, and more. By leveraging technology and outsourcing non-core functions, many services can be delivered at a lower cost than a traditional family office.
Virtual Family Office: The Future of Family Wealth
Virtual family offices are poised to play an increasingly important role in managing family wealth in the future. And has undoubtedly gained momentum as an efficient and cost-effective way for wealthy families to manage their assets and finances. The COVID-19 pandemic has accelerated this trend, as more families have become comfortable with remote work and virtual meetings. Some reasons why this is the way of the future for family wealth:
Single-family offices are private companies that provide personalized financial, investment, and administrative services to assist wealthy families or individuals. SFOs look after one family group, whereas VFOs look after several families, giving more families access to various professionals that can assist them in growing their wealth.
The Virtual Family Office Structure
The overall structure of a VFO is designed to provide a comprehensive suite of financial management services customized to each family’s specific needs. By leveraging technology and outsourcing non-core functions, VFOs have the ability to provide customized services and greater flexibility at a lower cost than a single-family office.
- Centralized Administration for all of the family’s financial affairs. This includes coordinating with various service providers such as accountants, attorneys, and investment managers.
- Governance structures and procedures help preserve family wealth over multiple generations. This can include creating a family mission statement, developing a family governance framework, and establishing clear lines of communication.
- Investment Management which oversees the family’s investment portfolio, including asset allocation, risk management, and performance monitoring. This can include the use of sophisticated investment strategies and products.
- Working with the family to develop a comprehensive financial plan that considers their long-term goals and objectives. This can include retirement planning, estate planning, tax planning, and philanthropic planning.
- Provide regular reports to the family on the performance of their portfolio and the status of their financial affairs. Online portals, video conferencing, and other digital tools often facilitate
- Coordinating with various service providers to ensure that the family’s needs are being met. This can include managing relationships with banks, custodians, and other financial institutions.
The Human Context
While technology can be an essential tool, the human element is equally important. The success of a multi-family offices or VFO depends on human relationships and trust that are built between the family.
- There is a need for strong relationships with family members to understand their unique needs, preferences, and goals. Developing a deep understanding of the family’s culture and dynamics is essential.
- Establish trust with family members and always maintain confidentiality. This is particularly important given the sensitive nature of family offices’ information.
- Effectively communicate complex financial information clearly and effortlessly so everyone in the family understands.
- Skilled in conflict resolution and able to manage potential conflicts in a way that is respectful and constructive.
- There is a need to be able to adapt to changing circumstances and be flexible in their approach to problem-solving. This requires a willingness to learn and the ability to think creatively.
Family governance refers to the set of structures, processes, and procedures put in place to manage the family’s wealth and ensure the long-term preservation and growth of their assets. Effective family governance requires a collaborative approach involving all family members and their advisors. Key elements of family office governance include.
- The family mission statement outlines the family’s values, goals, and vision for the future. It serves as a guiding document for all decisions made.
- The family council is a group of family members who are responsible for making decisions related to the family’s wealth and managing the family office.
- Succession planning involves planning for the transition of leadership and ownership of the family office to the next generation.
- The investment policy outlines the family’s investment objectives, risk tolerance, and asset allocation strategy. This framework is a guide for making investment decisions and managing the family’s portfolio.
- Risk management involves recognizing and overseeing the risks related to the family’s wealth. This can include investment risk, legal risk, and reputational risk.
- Communication is critical to effective family office governance. Regular communication between family members, advisors, and service providers is necessary to ensure everyone is aligned and working towards the same objectives.
Virtual Family Office Technology
Technology to manage the family’s wealth and streamline operations is key to the success of the business and family. They allow for efficiency, making the client experience the number one priority.
- Financial planning software creates customized financial plans for each family member based on their unique goals and objectives. This software can also be used to track progress towards these goals and adjust as needed.
- Portfolio management software manages the family’s investment portfolio, including asset allocation, rebalancing, and performance reporting.
- Given the sensitive nature of the information, cybersecurity is a critical consideration. At a minimum, this should include multi-factor authentication and encryption to protect client data.
- Collaboration tools allow VFOs to communicate with clients and other professionals in real time via video conferencing, instant messaging, and CRM software.
- Digital document management tools to store and organize important documents such as estate planning documents, tax returns, and investment reports.
- Automate repetitive tasks using AI, such as data entry and analysis. This frees staff time for more strategic financial planning and client service activities.
A family office coordinator is a key member of the team that helps manage a family office’s day-to-day operations. There responsibilities include:
- Managing the family’s calendar includes scheduling meetings, coordinating travel, and managing the family’s social calendar.
- Providing administrative support, including filing, data entry, and correspondence tasks.
- Managing the family’s finances includes tracking expenses, paying bills, and managing investments.
- Overseeing the family’s assets, including managing real estate, art, and other assets.
- Providing support to other family office team members: This includes providing administrative support, answering questions, and helping coordinate projects.
The role of a family office coordinator is essential to the smooth operation of a family office. They are responsible for a wide range of tasks, and they play a key role in ensuring that the family office is able to meet the needs of the family.
The Importance of Human Element
The human element is an essential part of any business or organisation. It is the people who make the decisions, who provide the service, and who create the products. The human element is what makes a business or organisation unique and successful.
Here are some of the reasons why the human element is so important in an VFO:
- Strong relationships: Family office professionals must build rapport with family members and develop trust. This requires listening actively, empathising, and responding to family members’ needs.
- Trust:Family office professionals must maintain the confidentiality of all information that they are privy to. This includes financial information and any personal or sensitive information that family members share with them.
- Communication:Family office professionals must be able to communicate complex financial information in a way that is clear, concise, and easy to understand. They must also be able to tailor their communication style to the individual needs of each family member.
- Conflict resolution: Family office professionals must be able to mediate conflicts between family members in a way that is respectful and constructive. They must identify the root of the conflict and help family members find a mutually agreeable solution.
- Adaptability: Family office professionals should be flexible and adapt to changing circumstances. This requires a creative approach to problem-solving and creating new solutions when the old ones no longer work.
You Need Effective Investment Management
An investment advisor is an essential element in working with HNW families. These benefits include:
- Professional that has specialized knowledge and expertise in investing. They can help investors navigate complex financial markets and identify investment opportunities that may be absent to the average investor.
- Diversification across different asset classes and regions. This reduces the impact of market volatility on investment returns.
- Risk Management skills, including market, credit, and interest rate risks. By actively managing risk, investment managers can reduce the potential downside and help families achieve their financial goals.
- Investment management can help families realize higher long-term returns by identifying undervalued assets, managing risk, and taking advantage of market opportunities.
- Help investors develop and implement a long-term investment strategy that supports their goals and risk tolerance. Helping families achieve their goals and manage risk.
- Outsourcing investment management to a professional allows the families space to focus on other important areas. This essentially gives the family more time to concentrate on other aspects of their lives or businesses.
Could Now Be the Right Time for a Virtual Family Office?
The answer to this question does depend on several factors specific to each family’s situation. That being said, there are several reasons why now might be a good time to consider a virtual family office:
- Increased Focus on Technology making has made virtual family offices more accessible and easier to implement than ever before.
- Virtual family offices can be significantly less expensive than traditional ones, making them an attractive option for families looking to reduce expenses.
- Many families today are spread across different regions and countries, making it more difficult to coordinate financial affairs. A virtual family office can help to bridge these geographic divides and provide a centralized platform for communication and collaboration.
- As families grow, so do their complexities, which makes managing their financial affairs increasingly challenging.
- The pandemic has highlighted the importance of privacy and security, particularly as more financial information is shared online. Virtual family offices can provide secure, encrypted platforms for storing and sharing sensitive financial data.
Benefits of the VFO
- Cost-Effectiveness enables families to access a wide range of services without having to pay for the infrastructure and staff required to run single-family offices, making them more accessible to a broader range of families. Lower fee’s for your investments due to greater leverage and buying power.
- Service is more flexible and can be tailored to the specific needs of each family, rather than offering a one-size-fits-all approach.
- The leverage of technology to streamline operations and offer services more efficiently. This can include using artificial intelligence to manage investments, digital platforms to communicate with clients, and online tools to track financial performance.
- We now live in a global world with families and their wealth spread across different contents, VFOs operate across borders, making it easier for families with international investments or interests to manage their wealth.
- Family governance, helps families to establish clear lines of communication and decision-making processes that can help preserve wealth across generations.
- Visibility into best practices, as the professional on your team, has visibility into best practices that other families.
Advantages, Disadvantages, and Costs
Briefly, virtual family offices offer a number of advantages and disadvantages over traditional family offices.
How Much is Enough?
The amount of wealth needed to consider having a virtual family office can vary depending on the family’s specific needs. Generally, virtual family offices can be a good fit for families with investable assets of $50 million or more. However, some families with lower levels of assets may also benefit from the services of a virtual family office.
The decision to establish a virtual family office should not be based solely on the family’s assets but on their unique financial goals, the complexity of financial affairs, and the desire for specialized services and expertise.
- Cost Savings, since each family doesn’t require physical office space, equipment, or staff. This can be particularly favorable for smaller or mid-sized families that require more resources to support a traditional family office.
- Accessible, anywhere worldwide, making it easier for family members and service providers to collaborate and communicate. This can particularly benefit families with members from different countries or regions.
- Scalable, they can be scaled up or down as needed, depending on the size and complexity of the family’s financial affairs. This makes it easier for families to adjust to changing circumstances or to accommodate new family members.
- Being heavily reliant on technology can provide many benefits, including improved data security, better organization and tracking of financial data, and faster and more efficient communication and collaboration.
- Customization tailored to the specific needs of each family. This can help families achieve their unique financial goals and objectives.
- Limited Personal Interaction due to heavy on technology to communicate and collaborate. This can limit personal interaction between family members and service providers, which may be less appealing to families who value face-to-face interactions.
- Overly Dependence on Technology can create vulnerability to cyber-attacks, system failures, and other technology-related risks.
- Privacy and Security Concerns with the reliance on online platforms to store and share sensitive financial information. This can be a significate issue if appropriate security measures are still implemented.
- Challenges with Coordination, mainly if family members and service providers are spread across different time zones and regions. This can make it more challenging to schedule meetings and coordinate activities.
- Limited Scope, then traditional family offices, particularly if they lack a physical presence. This can limit the types of services that can be provided and the level of support that can be offered.
How Much Does it Cost?
Some families may choose to establish a virtual family office as a cost-effective alternative to single-family offices. In contrast, others may see it as a way to improve communication and coordination among family members and service providers.
The cost of having a virtual family office depends on the specific services the family requires. Some of the factors that can impact the cost of a virtual family office include the level of support needed, the complexity of financial affairs, the number of family members involved, and the specific services required.
There are several ways that VFOs charge and it will depend on the office and service required by the family. However, traditionally it will be one of 2 ways, a flat fee for service, or a percentage of assets under management.
The cost of a virtual family office can range from $10,000 to well over $100,000, depending on the level of services and expertise required. However, it’s important to note that the cost should be weighed against the potential benefits of improved financial management, greater coordination among family members and service providers, and the potential for better investment returns.
VFOs offer a number of advantages over traditional family offices, including:
- Cost-effectiveness: VFOs can be significantly less expensive to operate than traditional family offices, as they do not require the cost of maintaining a physical office or staff.
- Flexibility: VFOs can be tailored to the family’s specific needs, and the services offered can be adjusted as the family’s needs change.
- Expertise: VFOs can tap into a network of independent professionals with deep expertise in various areas, such as investment management, tax planning, and estate planning.
Keeping up with the Joneses
The saying “Keeping up with the Joneses” is often used when making decisions about the need for a single-family office (SFO) vs. a multi-family office (MFO) or virtual family office (VFO). However, the question that affluent families should be asking is, “What additional benefits will you get from an SFO that you will not be able to achieve with a VFO?”
Keep Your Stuff Together and Take Your First Step
VFOs can tap into a network of independent professionals with deep expertise in a variety of areas, which can give affluent families access to a broader range of resources that may not be available from a traditional family office or MFO, for that matter.
- Greater transparency: VFOs typically operate with greater transparency, which can give families more confidence in the services they are receiving.
- More flexibility: VFOs can be more flexible than Multi-family offices, as they are able to become the centralized place for the family to access services in addition to wealth management services. These could include a family coach, an events manager, or impact investment advisors.
If you are considering setting up a virtual family office, there are a few things you should keep in mind:
Define your needs: Before you start looking for a VFO, it is important to define your needs. What services do you need? What is your budget?
Do your research: There are a number of VFO providers available, so it is important to do your research and compare different providers before making a decision.
Get everything in writing: Once you have chosen a VFO provider, ensure you get everything in writing, including the scope of work, fees, and the terms of the agreement.
Creating Client Value
Creating client value requires a holistic approach that considers each family’s unique needs and circumstances. Here are some key steps that family offices can take to create client value:
- Develop a meaningful understanding of the client’s goals, legacy, and values. This ongoing communication ensures that the family office fully aligns with the client’s needs and priorities.
- Customize services and solutions specific needs of each client. This requires a deep understanding of the client’s financial situation, risk tolerance, and long-term goals, and the ability to develop customized solutions that address their unique needs.
- Provide specialized expertise across a range of areas, including investment management, risk management, tax planning, estate planning, and philanthropy. This requires a team of professionals with deep expertise in these areas who can provide strategic advice and guidance to clients.
- Deliver exceptional service to clients, including responsiveness, accessibility, and personalized attention. This requires a commitment to client service and a culture that prioritizes client needs above all else.
- Build long-term relationships with clients that are based on trust, transparency, and accountability. This requires ongoing communication, regular reporting, and a commitment to continuous improvement.
A virtual family office can be a valuable asset for families with significant wealth. VFOs can effectively assist families in managing their wealth and attaining financial objectives by offering diverse services and promoting increased transparency.
If you would like more information about Virtual Family Offices,
connect with one of our advisors in our Contact Us section to the right.
– Katie McDonald